by Kurt Mars and Jim Manley, PwC
More than 36 million smart meters have been installed in the U.S., and that count is expected to nearly double to 65 million by 2015, according to the Institute for Electric Efficiency.
The cost to modernize the U.S. power grid is expected to be great. Smart meter deployments routinely exceed $1 billion. Although the American Recovery and Reinvestment Act of 2009 provided $3.4 billion in grants to spur smart grid investment, the expansion of these programs, as well as increasing deployment of distributed and renewable generation and an emphasis on energy efficiency, load control and demand response, have created additional funding requests. With the estimates of long-term investment in the billions, regulators are applying a critical eye to business cases for these implementations, and utilities are looking for every possible way to maximize benefits to ratepayers and shareholders.
This increased scrutiny is no secret. Headlines tell of utilities where technology maturity, consumer acceptance and other program aspects have created short-term program issues. As these first-generation programs reach sustained operation, however, likely there will be new scrutiny paid to ongoing operational costs and benefits, as well, some of which might never be realized. Utilities confronted by these circumstances often are looking for new cost offsets or benefits that can be used to minimize these impacts to planned program performance.
In any smart grid deployment, disciplined assessment, planning and management are fundamental to containing costs. But ancillary strategies to offset this spending often are overlooked. Power and utility companies can generate cash to offset cost overruns with some of the tax credits and deductions associated with smart meter deployments.
Uncovering Tax Credits
Identifying areas in the smart grid value chain that can provide tax benefits could help offset overall cost of the project but can be difficult to capture all of the potential tax savings related to these implementations. That's because there is no one authority or clearinghouse for information on smart grid tax benefits. In lieu of that, power and utility companies should assess their spending to date, as well as project expenditures, with careful emphasis on reviewing each component of cost separately. The first step might be to categorize smart meter spending into cost buckets related to hardware and software, then to identify potential tax credits, deductions and other savings associated with each bucket. For example, instead of a 20-year tax life for the old meters, taxpayers are permitted an accelerated depreciable life for smart meters. Taxpayers should ensure they are taking advantage of this. Other opportunities might include some of the following:
R&D tax credits and deductions for R&D and software development. During the past year, smart grid benefits have been countered by consumer concerns about inaccurate meter readings, unreliable data transmission, potential health and safety hazards and data privacy concerns. To resolve these technical and safety issues, utilities typically invest significant effort into research and experimentation with the meters.
Many do not realize that some of the costs related to resolving these technical uncertainties might be eligible for federal and state research and development tax credits and deductions. Similarly, certain components of a company's investment in writing software is necessary to process the data generated by these meters and may be deducted for tax purposes, rather than capitalized and amortized.
Property taxes. Although many state and local tax jurisdictions assess meters in general as personal property, certain jurisdictions provide specific exemptions that might apply to smart meters and other similar equipment. Each state and locality will assess this type of property differently, so it's important to investigate how meters are evaluated throughout all operating regions. In addition, certain jurisdictions allow taxpayers to exclude the value of the software embedded in the meters from the value on which property taxes are assessed.
The size and frequency of smart meter programs require that power and utility companies proactively seek auxiliary methods to offset these outlays. Tax credits on smart meters can provide additional funding without added expenditures.
Kurt Mars is a tax partner in PwC's power and utilities practice based in San Diego. Reach him at firstname.lastname@example.org.
Jim Manley is the state and local tax leader of PwC's power and utilities practice based in Detroit. Reach him at email@example.com.